By Dietrich Knauth

Law360, New York (September 27, 2013, 7:32 PM EDT) — As U.S. defense companies ramp up their search for opportunities abroad, getting familiar other nations’ evolving bid protest practices can be a helpful step in ensuring they are treated fairly in competitions, experts say.

The U.S. procurement system is unique in its long history of allowing prospective contractors to challenge government contract decisions, and despite domestic criticism of the delays and litigiousness that sometimes result, other nations continue to look to the U.S. as they establish or amend their own versions of bid protests.

Protest systems are increasingly seen as essential to a good public procurement framework, and are encouraged by the United Nations Commission on International Trade Law, the World Trade Organization and the U.S., which insists that partners in free trade agreements, including the North Atlantic Free Trade Agreement, have some kind of bid protest system.

“Bid protests are a standard part of procurement reform all around the world now,” said Daniel Gordon, associate dean for government procurement law at George Washington University. “A bid protest mechanism is typically an unusually efficient way of attaining both transparency and accountability in government contracting.”

Advocates of the U.S. system say allowing private companies to enforce procurement rules increases transparency, reduces corruption and encourages competition, allowing governments to get better value for their purchases. But to take advantage of bid protests in other nations, U.S. companies will have to keep in mind that the rules and culture surrounding bid protests can vary significantly.

Here are four tips for U.S. defense companies looking to take advantage of bid protests abroad:

Recruit Local Counsel

As they adjust to decreased U.S. military spending, American defense companies will have to do business in nations where bid protests are not as ingrained in the procurement process.

Although many countries seem to model their protest systems on the U.S., the rules won’t be the same everywhere. In the U.K., for example, protests are handled in court. In Germany, procurement protests go to specialized administrative bodies.

“Every country is different, and even within the E.U., the 28 member countries have different laws, including different protest laws,” Gordon said. “They have 28 different ways of solving problems.”

Contractors should partner with local counsel to help them navigate the different rules, according to Allen Green, a partner at McKenna Long & Aldridge LLP.

“As you move outside the U.S., E.U. and Canada, you’re really entering into public procurements that are much less transparent. They’re going to have, to varying degrees, some form of protest procedures, but the likelihood of success is something that companies are going to have to think about and work through with knowledgeable local counsel,” Green said.

Adjust Your Expectations

The U.S. bid protest system is stronger in many ways than other nations’, and U.S. companies will have to adjust their expectations when getting involved in protests abroad.

The U.S. allows protests to negate or overturn contract decisions, even after the signing of a contract, and offers an automatic stay that halts work on procurements that are protested at the U.S. Government Accountability Office, which handles most U.S. bid protests and is generally seen as a fast and cheap option for protesters.

American contractors can also protest in the U.S. Court of Federal Claims, which offers legally binding rulings through more extensive litigation and can serve as a backup if a GAO protest fails. Such a system is rarely present in other nations.

In growing markets like China, India, Korea, the United Arab Emirates and Saudi Arabia, U.S. companies will have to temper expectations that bid protests will be as effective as they are in the U.S., Green said.

“If all goes south and you’ve been badly treated, there’s going to be a much narrower spectrum and much less done than  there is the U.S.,” Green said.

In places with less transparent governments, protests could be a dicey proposition even when procedures are in place. University of Maryland law professor Daniel Mitterhoff recently studied a Chinese bid protest that was ignored by the Chinese government for nearly seven years because it fell into a legal grey area between two of China’s multiple bid protest systems.

“In some countries it doesn’t look like there’s a lot of progress toward a meaningful, effective protest system even when they exist on paper,” Gordon said.

Monitor Developing Bid Protest Regimes

Companies should keep an eye on markets that are developing or have recently developed bid protest regimes. Bid protests are growing at an uneven pace across the globe, according to Gordon, who has witnessed the rise of bid protests firsthand.

As the former head of the bid protest division at the GAO, he was consulted by foreign governments interested in setting up their own protest mechanisms, including Norway, Turkey and Tanzania, all of which have protest systems now. He has continued that outreach as an academic, recently working with officials from Vietnam, Morocco, Algeria, Libya and Tunisia — and says international interest in bid protests remains strong.

“Besides an interest in improving legal systems abroad, American companies want to export, and you want to have a solid procurement system overseas to ensure that American companies are treated fairly,” Gordon said of the Commerce Department’s interest in promoting bid protests overseas. “You don’t want to have corruption and you don’t want to have favoritism.”

Ralph White, who currently heads the GAO’s bid protest team, said foreign visitors continue to ask GAO about its protest policies. Not only does the U.S. have the longest tradition of hearing bid protests — a system that began informally in the 1920s and was codified by regulations in the 1970s and the Competition in Contracting Act in 1986 — the U.S. also spends far more on contracts than any other nation, making it a natural source of best practices for protests, White said.

“We end up with visitors from all over the world coming to Washington from other governments. Invariably, they want to talk about bid protests and they are fascinated and amazed that the U.S. government will put itself through this process,” White said. “The idea that you could challenge who it is the Defense Department is giving contracts for missile defense, they’re just amazed by it.”

For governments challenged by corruption and bribery, bid protests are seen as a crime-fighting tool, in a way that they aren’t in the U.S., which will help spur more countries to adopt them, Gordon said.

“Why exactly does having a police car on the side on the side of the road prevent people from driving 80 miles per hour? At least on the margins it causes people to be somewhat more careful,” Gordon said. “Crime hates sunshine, and [protests] provide sunshine to the contracting process. It provides vitamin T, it provides transparency.”

Prepare for Backlash and Reforms

While governments value the transparency and accountability that protests bring, they also struggle with the delays and litigiousness that are part of the package. The U.S. has seen frequent calls for reform, including ideas like charging a fee for “frivolous” protests, raising the dollar-value threshold for which contracts can be protested, and a U.S. Department of Defense proposal that would force contractors to choose between the GAO and the Court of Federal Claims, rather than allowing them to retain the court as a backup plan.

As protests rise across the globe, other governments will face similar pushback, Gordon said. Ten years ago, while Gordon was at GAO, the government of Norway invited him to give advice on setting up a protest forum. It was successful, but after the forum was in place, Gordon said he began to hear familiar complaints out of Norway’s government.

“Within the first two or three years of setting up the bid protest forum there was criticism that there were too many bid protests being filed, and I had to chuckle to myself, because I’d been hearing the same criticism back at home,” Gordon said. “Government officials will always tell you that there are too many protests.”

Published by Law360

By Dietrich Knauth

Law360, New York (May 14, 2013, 9:09 PM EDT) — The U.S.’ failure to enforce nontaxation agreements has allowed Afghanistan to collect more than $920 million in improper taxes from U.S. contractors, according to a new report that experts say highlights the persistent challenge of coordinating federal agencies to ensure war spending isn’t wasted.

The Special Inspector General for Afghanistan Reconstruction, or SIGAR, reported Tuesday that his office examined $921 million in business taxes and penalties levied against 43 contractors supporting U.S. rebuilding efforts in Afghanistan, in spite of agreements meant to ensure that U.S. contractors aren’t taxed. Those agreements “appear to be failing in their purpose,” in part because the U.S. Department of Defense, Department of State and the U.S. Agency for International Development have failed to make a coordinated effort to push back against improper taxes, often leaving contractors to fend for themselves.

“It’s disturbing that the Afghan government is targeting American contractors with unjust taxes and intimidation,” Special Inspector General John F. Sopko said. “It’s even more disturbing that U.S. agencies are letting it happen — all at the expense of American taxpayers, who have already shouldered a heavy burden on Afghan reconstruction. This needs to end.”

Of the $921 million examined by SIGAR, $93 million falls clearly under a tax category that both the U.S. and the Afghan government agreed should be exempt, and SIGAR believes that many of the remaining taxes are also illegitimate.

Congress took quick notice of SIGAR’s report, and Rep. Peter Welch, D-Vt., on Tuesday reintroduced legislation that would block all U.S. taxpayer assistance to Afghanistan until a new bilateral agreement on taxes is reached.

“It is incomprehensible that the government of Afghanistan, with its abysmal track record of corruption, would actually think it is a good idea to tax assistance provided by the American taxpayer,” Welch said. “We shouldn’t give another dime to the Afghan government until they agree to stop ripping off the American taxpayer.”

Experts say that SIGAR’s report is just further evidence of the difficulties that the U.S. faces in getting USAID, DOD and the State Department on the same page when it comes to wartime contracting issues. The recently closed office of Sopko’s counterpart in Iraq, the Special Inspector General for Iraq Reconstruction, has recommended creating a new federal agency to oversee rebuilding efforts in future contingency operations, but the agencies have resisted those recommendations, and some contractors have also opposed the plan as creating another layer of bureaucracy.

Charles Tiefer, a law professor at the University of Baltimore and a former member of the Commission on Wartime Contracting, said the U.S. agencies need to present a more unified front on wartime contracting, whether or not a new agency is introduced.

“There needs to be some structural change,” Tiefer said. “If the agencies coordinated and presented a strong and unified stance to the Afghan government, they could at least reduce the scale of improper Afghan taxing of American efforts.”

Fragmented planning for rebuilding contracts greatly increases the risk of waste and fraud, and that’s especially true in Afghanistan, where corruption is part of the culture, and where President Hamid Karzai’s government has tried to maximize its share of the U.S. and international cash that supports its institutions, Tiefer said. Afghanistan’s tax collectors don’t respect the tax exemption agreements signed by its diplomats, and the tax issues seem to be an echo of previous efforts to force contractors to hire a new Afghan security force in place of private guards, Tiefer said.

“The strategy here on the Afghan side may appear chaotic but in fact comes from the Karzai administration, which treats American contract funding in several ways as its very own piggy bank,” Tiefer said. “The U.S. taxpayer puts up money to build schools and infrastructure in Afghanistan, and the Afghan government turns around and engages in double dipping, getting both the U.S. funded project and skimming extorted taxes as well.”

Contractors say the report simply adds concrete data to the reality they’ve been facing for some time. The Professional Services Council, a contractor trade group, agreed with SIGAR’s calls for better coordination between agencies and more training on the tax exemption agreements for U.S. contracting officers, to prevent representatives of the Afghan government from exploiting inconsistencies in an effort to “shake down” contractors.

“The report confirms what PSC has long argued in letters, white papers and meetings with government officials: The U.S. government’s lack of a unified position in resolving the Afghan government’s inappropriate taxation of U.S.-funded contracts has hindered contractors’ efforts to support the U.S. government in Afghanistan,” said Alan Chvotkin, general counsel and executive vice president of PSC. “As the IG found, the lack of response increases the costs of U.S. government projects in Afghanistan and diverts U.S. funding from program objectives specifically defined by Congress and the contracting agencies.”

Because of tax disputes, the Afghan Ministry of Finance has restricted contractors’ freedom of movement, hurting the ability of contractors to support U.S. missions, and has even arrested at least one contractor because of unresolved tax issues, SIGAR reported.

Some U.S. agencies’ contracting officers do not appear to understand Afghanistan’s tax laws and have improperly reimbursed contractors for taxes paid to the Afghan government, and contractors have begun billing the U.S. government for the tax costs, or adjusting their bids to account for increased costs due to the Afghan taxes, according to SIGAR. The U.S. agencies have paid improper taxes, through contractor reimbursement, without helping contractors fight the taxes or helping contractors obtain tax-exemption certification ahead of time, the report found.

The contractors caught in the middle may face additional trouble down the road, since billing the government for improper taxes may go against federal regulations, Tiefer said.

“These contractors may be violating the rules on reimbursement when they pass on taxes that they shouldn’t have paid,” Tiefer said. “They’re getting away with it now, and that means that in some ways they’re happier avoiding friction with the Afghan government, at the cost of milking the American taxpayer through reimbursement.”

SIGAR recommends that the secretary of state take the lead in developing a consistent, unified position on what the U.S. government deems appropriate taxation of contractors, and make efforts to recover any improper tax payouts. But while the DOD concurred with SIGAR’s recommendations, State resisted, saying it “did not explicitly agree or disagree,” while arguing that the agencies already have a unified position. State also said it “neither agreed nor disagreed” on recommendations to recover tax payments.

The State Department also questioned SIGAR’s authority to examine issues related to the tax treatment of contracts, causing SIGAR to write that it is “concerned that State chose to focus initially on the bureaucratic question of which oversight agency is the appropriate one to examine this issue, rather than turning its attention to devising solutions to the problems we identified in this report.”

While the tax issue is serious on its own, it also points to a larger pattern of the Afghan government trying to maximize what it can take from U.S. and internationally funded rebuilding efforts, Tiefer said. Afghanistan previously banned contractors from hiring foreign-owned private security companies, forcing them to hire a new Afghan government agency, the Afghan Public Protection Force, at a higher price than the contractors were originally paying.

The focus on maximizing short-term payouts doesn’t bode well for the future, Tiefer said, especially as U.S. forces plan to exit Afghanistan and turn over the country’s security to its fledgling armed forces in 2014.

“Supplying their treasury by extorting tax payments from the US treasury is a very short-term strategy, and they are materially diminishing their country’s prospect for surviving after American troops pull out and some of the reconstruction effort drops off,” Tiefer said. “This report shows that the Afghan government is sucking only too much from the teat of the American treasury, and needs to be weaned off its rich diet.”

Foreign aid projects make up an enormous part of Afghanistan’s economy — 97 percent, according to a Senate Foreign Relations Committee report from 2011. Since 2002, Congress has appropriated over $89 billion to U.S. government agencies, including DOD, State and USAID, for humanitarian and reconstruction programs and projects in Afghanistan, according to SIGAR.

Published by Law360